The Questor Column

Do your sums on BT's parts

FAST forward to 2003. British Telecom has been broken up. Its Cellnet and more mobile division has been sold to a Spanish - or is it Italian? - mobile operator.

Its business telecoms ventures, Concert and Ignite, have been demerged, creating a fast-growing, Europe-wide operator. The domestic business has been broken into two. The heavily regulated wholesale arm, which owns the copper wires in the ground, has a new silly name and has been spun off into an independent business providing fast internet capacity.

Among its customers is a relatively small company called BT that provides telephone, television, gas and electricity services to 20m homes.

Although there is no certainty that the scenario above will occur as described, the monolithic phone company is taking the first steps to divide itself up into more focused parts that will either succeed or be acquired.

BT's Wireless division is to be demerged later this year and represents the most attractive acquisition opportunity in the sector since Orange disappeared nearly two years ago. The company is considering demerging its Wholesale business and the position of Ignite and its half-stake in Concert is under review.

Corporate empire builders may recoil at the prospect of a break-up for the group but Questor believes that it could be very good news for shareholders. After all, the strategy worked well for British Gas.

Meanwhile, the worst is now behind the company. Its debts are coming down fast: from £28 billion at the end of March to about £16 billion in the summer, once the company's £5.9 billion rights issue is completed.

With these prospects, Questor believes that BT investors should take up their rights to three new 300p shares for every 10 they hold. Investors have until Friday morning to apply. Do so quickly.

Canny Macdonald offers value

MACDONALD Hotels proudly declared yesterday that it had trebled its profits since March 1996's flotation at 145p.

So, have the shares done something similar? Er, no. Yesterday, they closed up 8.5 at 165p after another fair set of results and an 8pc full-year dividend rise to 6.5p.

Shareholders are not in love with small hotel stocks, as Donald Macdonald, chief executive, has found to his cost. So far, their attitude has stymied his chances of growing the business by issuing equity. So, being a canny Scot, he's now using debt.

The £235m 50-50 joint venture with the Bank of Scotland to acquire the 48 Heritage hotels may finally make the equity boys take notice. Showing even more ambition, Mr Macdonald lined up Royal Bank of Scotland to back a bid for the four times bigger Posthouse, although he was beaten by Bass.

Heritage is still a big step. Its pricier southern hotels fit well geographically, give the group more scale and bring an experienced manager to the board in Guy Crawford. Spending £30m over two years to add fitness clubs and conference rooms should increase Heritage's share of corporate clients.

Meanwhile, the group should be able to get more out of the core Macdonald estate, where revenue per available room rose by 9pc to £38, even though occupancy was 11 percentage points below the 71pc average for UK provincial hotels.

The timeshare business, Barratt, makes a slightly odd fit but spending £8.5m to buy out the half Macdonald does not own is a cheapish route to control, even if the Office of Fair Trading is now sticking its nose in.

Heritage will only make a small contribution in the first year. Adjusting for the change of year-end to September, underlying full-year profits forecasts of £16m put the shares on a prospective multiple of eight times, yielding 4.2pc. Cheap.

Triad bucks the trends

IT'S a rare thing these days when a company in the software services sector more than doubles its profits in a year.

That's what Triad did yesterday. The software and systems consultancy unveiled a 137pc jump in profits before tax to £4.5m. The shares rose 16.5 to 266.5p after the company reported firm demand from clients and said it was in negotiations over new projects.

Yesterday's figures were flattered by the previous year's poor performance, when clients tightened their purse strings after splashing out on new Millennium Bug-proof systems.

However, the earnings growth should continue. A clue to this is the fact that the sharp rise in profits came despite turnover rising just 9pc to £52.8m. This is because the company's cost of sales revolves around how the company uses its staff. In the previous year, Triad had lots of contractors on its books who it couldn't get rid of.

So when the upturn came costs hardly moved, meaning that the revenue hike fed straight to the bottom line.

Triad's client list includes well-funded blue chips like J Sainsbury, Tesco and Cable & Wireless. There is not much evidence of dodgy dotcoms and the "negotiations" are with several FTSE 100 companies on e-commerce projects.

On forecast profits before tax of £6m the shares trade on less than 17 times earnings, excluding 32.5p per share of cash. The yield of 1.5pc is low but the presence of a dividend is an incentive rarely found in the sector.

With a market value of less than £65m, Triad is also a takeover target for larger players. Buy.